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| Three
Black Crows Candlestick Formation |
THE OMINOUS CALL
OF THREE BLACK CROWS
The three black crows candle formation does not happen very
frequently in stock trading, but when it does occur swing traders should
be very alert to the crow's caw.
The candlestick pattern's metaphor is three crows sitting in a tall
three. Essentially, it is a reversal formation that occurs following a
strong advance.
On the day the first black crow makes its appearance, the formation is
most predictive if the first "crow" -- or dark candlestick --
closes below the white candle's real body. That is the first step in
setting up a Minor trend reversal -- where today's high is lower than
yesterday's high and today's low is below yesterday's low.
Two more long-bodied consecutive down days then ensue. On each of these
days, it appears as if the stock wants to regain its former strength, as
the stock opens higher than on the previous day. By the end of each
session, however, the sellers regain control and the stock drops to a
new closing low. Here is what three black crows candlestick pattern
looks like:
Note that the lower shadows on three
black crows are small, or in some cases even nonexistent. Although three
black crows is a complete pattern in and of itself, swing traders should
always be alert to what happens on the fourth day after the pattern is
formed. Since there has been intense selling throughout the pattern, the
stock may then be overextended to the downside. However, if the stock
continues its negative pattern on the fourth day, then it is likely that
the issue is going much lower.
The chart of Openwave Systems (OPWV) below, while not a classic example
of three black crows, nevertheless illustrates many of its main
features. Note that in late September the stock bottomed near $12 when
two lower shadows in three candles tested the bottom Bollinger band. A
Minor rally, which lasted eight trading days, then took OPWV back into
an area of strong resistance just above $14.
On the first day of the three black crows pattern,
which I've circled in the chart above, the black candle negatively
engulfed the previous doji. (This is often a potent reversal signal in
and of itself.) Days two and three follow the three black crows script
closely, with the candles opening near their highs and closing near
their lows. During this time, MACD and stochastics both gave sell
signals and Openwave broke below its important 30-day moving average.
On the fourth day, the best the stock could eke out
was a doji-like candle at $13. From there, Openwave fell below $11
before finally staging a short-term rally. Despite recent strength in
the S&P and Nasdaq, the shares still remain well below the level at
which the three black crows formation took place, and they should face
significant resistance at $12.
Be very alert when you see three black crows appear on a chart. Their
appearance indicates a period of powerful selling pressure. If on the
fourth day the stock cannot gather strength, then lower prices are
likely ahead.
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